SLLs add use cases in New Zealand
A pair of environmental, social and governance-aligned loans written by New Zealand borrowers in March demonstrate the growing local appeal of this type of borrowing. Auckland Council demonstrated the applicability of sustainability-linked debt in the government sector, while Morrison & Co introduced a sustainability use-of-proceeds facility to the public-private partnership space.
Daniel O'Leary Editor KANGANEWS
Chris Rich Staff Writer KANGANEWS
Auckland Council wants to shift all its bank debt into sustainability-linked loan format, following its conversion of an existing standby facility and execution of a sustainability-linked interest rate swap. The council says the transactions represent the latest steps linking funding to its sustainability goals.
Auckland Council announced the conversion of a NZ$200 million (US$138.4 million) bilateral facility with ANZ to a sustainability-linked loan (SLL) on 15 March. Andrew John, funding manager at Auckland Council, tells KangaNews the council’s goal is to convert all its bank standby facilities to the sustainability-linked format.
“The potential impact of individual SLLs and SLDs [sustainability-linked derivatives] is relatively small in an economic sense but it will become quite meaningful when we start aggregating all our facilities and derivatives into sustainability-linked format. It will further incentivise us to achieve the SPTs [sustainability-performance targets],” John explains.
Auckland Council’s treasury policy requires it to hold a certain level of liquid assets. It has NZ$1.3 billion in standby facilities, NZ$300 million of which is with the New Zealand Local Government Funding Agency. This leaves about NZ$800 million for potential conversion to SLL format after the ANZ facility transition.
The council’s three SPTs focus on supporting Maori and Pasifika owned business and social enterprises in Auckland by strengthening its social procurement model, increasing the number of operational low-emissions buses and reducing the organisation’s greenhouse gas (GHG) emissions.
John says the SLL has two reference periods – in June 2023 and June 2024 – that will be used to ascertain whether the council is meeting its goals. The deal structure also includes the option to add additional reference periods as it develops further targets. Borrower and lender have not disclosed further details of the SPTs or the loan’s pricing incentives. The loan structure includes independent assurance.
The emissions-related SPTs complement Auckland Council’s climate-action plan – Te Taruke-a-Tawhiri: Auckland’s Climate Plan – to achieve 50 per cent reduction in regional GHG emissions by 2030 and net zero emissions by 2050. “The SLL enables the council to drive climate action by using sustainable finance tools,” John says.
Dean Spicer, head of sustainable finance New Zealand at ANZ in Wellington, says evaluating Auckland Council’s stretch targets included an examination of historical data for each SPT – specifically how outcomes compare with the council’s stated ambitions and those of its peers.
He adds the council’s membership of C40 – a global network of cities implementing measurable, science-based targets to deliver concrete milestones for mitigation and adaptation – and council policies were also important considerations in ANZ’s assessment.
The borrower initially considered five SPTs but the challenge of data collection and target measurement for waste and biodiversity targets whittled the list down to three, according to John. He adds the council is improving its data capturing and systems in these areas so it can include them in future.
Though Auckland Council’s sustainable-finance framework allows it to issue sustainability-linked bonds (SLBs), the borrower would need to update its product disclosure statement on the New Zealand Exchange, John says. The council has no plans to issue an SLB, he notes.
Alongside the loan, the NZ$120 million SLD ties the cost of the council’s interest rate hedge to targets underpinning the SLL and follows Metlifecare’s execution of New Zealand’s first SLD in February.
“The primary motivation behind the product is not ordinarily the financial component,” says Spicer. “The benefit stems from the stakeholder focus, as targets tend to drive outcome performance.”
With the proliferation of SLLs in New Zealand, Spicer adds there is increasing interest from clients in how they can link their sustainability strategies with financial instruments.
Meanwhile, Morrison & Co completed a NZ$183.2 million five-year sustainability use-of-proceeds (UOP) loan that refinances debt issued at the public-private partnership (PPP)’s inception and that was due to mature this year.
Morrison & Co entered into the 25-year NZ Schools III PPP with New Zealand’s Ministry of Education in 2017. The project is aimed at the construction and maintenance of five new schools in Auckland, Hamilton and Christchurch.
DNV provides accreditation and verification of the loan’s sustainability elements, including energy efficiency, waste management, green building standards, water management and social features such as pedestrian access for residents and flexible learning environments for students. Commonwealth Bank of Australia (CBA) and CIBC underwrote the loan, while Societe Generale Australia was the key adviser.
Camille Wynter, director, sustainable finance at CBA in Sydney, tells KangaNews Sustainable Finance the school-based business model of the PPP naturally fit the social UOP category but adding a green aspect reflects the borrower’s ambition. “Schools do not necessarily have to meet any green standards but the consortium decided it wanted to meet additional environmental outcomes in the buildings’ design,” she says.
The schools have “great emissions profiles”, Wynter adds. There are also waste management and pollution prevention initiatives within the PPP framework, which adhere to UN Sustainable Development Goals. The buildings are designed to optimise electricity and are built for longevity. They add value to society from a social and environmental perspective.”
Jon Collinge, sustainability director at Morrison & Co in Sydney, says the loan will support the PPP to meet the environmental, social and governance (ESG) goals defined by its Public Infrastructure Partners II and III funds, which own the project.
“The schools have been designed with sustainable outcomes as a key objective,” he says. “They target a reduction in energy consumption of 25-40 per cent compared with a standard schools’ reference model. Our detailed modelling shows they have achieved about a 70 per cent reduction.”
Collinge adds that the New Zealand Schools III PPP has achieved a five star rating under the Global Real Estate Sustainability Benchmark infrastructure asset assessment, which he says is the “international ESG benchmark for infrastructure funds, companies and assets”.
The refinancing is the latest in a series of ESG-aligned loans secured for businesses owned by Morrison & Co-managed clients, including a similar facility in 2021 for the New South Wales Land Registry Services in Australia linked to Indigenous reconciliation, supply chain engagement and carbon emissions, and a sustainability-linked loan in 2019 for Queensland Airports. The latter deal’s interest rate is linked to ongoing airport carbon accreditation certification.
Wynter says New Zealand organisations are moving swiftly to bring their financing under sustainability standards. “New Zealand is one of the most progressive nations in the world on the sustainability issue – it has been thinking about this for decades. All our clients in New Zealand want to make a difference. It helps that the government is on board.”
Genesis Energy became the latest New Zealand company to issue a green, social and sustainability product, pricing a NZ$125 million six-year green bond on 4 March at 105 basis points over mid-swap. The deal follows the firm’s move to shift all its legacy financing to a sustainable financing framework.
“As facilities come up for refinance, new debt can be issued under a new structure,” Wynter adds. “It is a challenge but our clients want to do it – they have board approval and the money to spend on these types of initiatives.”
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